As the current year draws to a close, plan sponsors overseeing 401(k) plans have several essential tasks to complete to ensure a smooth transition from the old plan year to the new one. This guide provides insights into what you can expect and how to prepare effectively for the upcoming year. With InSight, plan years align with the calendar year, making January 1 the starting point for the new plan year.
Some elements of your tax mitigation and 401(k) planning strategy must be completed before the Dec 31st deadline. Consult your AIF®, CPA®, and CFP® today to make sure these are noted and can be completed by year-end:
Elect Final Contributions
For individuals with self-employed income, confirming owner’s draw elections by the December 31 deadline is essential, and this requirement extends to more than just owner’s draws.
It also encompasses bonuses and other spot compensation that employees want to count in this year’s contributions. This deadline is significant because it impacts how these additional forms of income are allocated within the 401(k) plan. Even if participants intend to allocate these contributions to the following year for the current plan year, adhering to the December 31 deadline ensures that these funds are correctly accounted for and accounted for in the appropriate tax year.
Bonuses and spot compensation, often received at year-end or sporadically, should not be excluded from 401(k) contributions. It’s crucial to communicate to plan participants that they have the opportunity to temporarily adjust their deferral rates via their dashboards before payroll processing, allowing them to make informed decisions about their retirement savings in light of these variable income sources.
Timely compliance with these deadlines ensures transparency and accurate accounting of all forms of income within the 401(k) plan, promoting financial security for participants and regulatory compliance for plan sponsors.
Verify or Update Company Information
Begin by confirming that InSight and the recordkeeper have the most up-to-date and accurate information about your company’s owners and officers. You can achieve this by completing the company information task on your dashboard. If you’ve switched or plan to switch payroll providers, it’s crucial to inform us promptly.
Make sure to review your employee roster, ensuring it includes any new hires and employees who have left your organization.
Monitor Your Compliance Dashboard
Access your compliance dashboard to review projected compliance results via the Compliance Status section on your administrator dashboard. More on Compliance testing is found here.
It’s important to note that Safe Harbor 401(k) plans automatically meet most non-discrimination testing requirements. More on Safe Harbor 401(k) plans can be found here.
Understand End-of-Year Payroll and Annual Limits
Keep in mind that bonus payments cannot be excluded from 401(k) contributions, even if they are paid separately from regular payroll. If participants are due to receive a bonus, inform them that they can temporarily adjust their deferral rates via their dashboards before payroll processing, if desired. Employer nonelective contributions and matches will apply to bonus pay as usual.
All payrolls with a payment date on or after January 1 will count toward the next plan year’s contributions, regardless of when the work was performed. In the context of 401(k) plans, compensation is recognized when it’s actually paid, not when it’s earned. If any employees reach annual contribution limits before the year-end, their contributions may be capped by either your payroll provider or recordkeeper to prevent exceeding these limits.
When the New Year Begins
At the onset of the new plan year, you can expect to receive tasks within your administrator dashboard, guiding you on essential actions to take. Here are some tasks you may need or want to complete:
Report Compensation and Self-Employment Income
Reporting compensation and self-employment income in 401(k) plans holds paramount importance as it forms the foundation for fair and accurate retirement savings. This crucial step ensures that participants’ contributions and benefits align with their actual earnings, fostering equity within the plan. Accurate income reporting not only helps employees maximize their retirement savings but also aids plan administrators in complying with regulatory requirements.
By meticulously documenting compensation and self-employment income, employers and plan sponsors can confidently navigate the complexities of 401(k) plan administration, contributing to the financial well-being of both the workforce and the organization as a whole.
Make Additional Employer Contributions with Profit Sharing
Making additional employer contributions with profit sharing is a strategic move that can significantly benefit both employers and employees within a 401(k) plan. This practice allows employers to share their company’s success directly with their workforce, fostering employee loyalty and motivation. It serves as an attractive incentive for employees to participate in the retirement plan, increasing overall plan engagement.
From an employer’s perspective, profit sharing provides flexibility in contributing to retirement accounts while potentially enjoying tax advantages. It aligns the company’s prosperity with the financial well-being of its employees, creating a win-win scenario that strengthens the employer-employee relationship and enhances the long-term retirement security of the workforce.
Consider making additional employer contributions with profit sharing, enhancing the retirement benefits offered to your employees. Explore the advantages of profit sharing.
Address Required Nondiscrimination Test Failures
Addressing required nondiscrimination test failures in a 401(k) plan is a crucial step to maintaining fairness and compliance within the plan. These tests are designed to ensure that retirement benefits are distributed equitably among all employees and not skewed in favor of highly compensated individuals or business owners.
When failures occur, it’s imperative to take corrective actions promptly as outlined by the IRS. By rectifying these issues, plan sponsors not only avoid potential penalties and legal complications but also uphold the core principle of retirement plans – providing a fair and equal opportunity for all employees to save for their future. Proactive resolution of nondiscrimination test failures not only safeguards the plan’s integrity but also fosters trust and confidence among plan participants, reinforcing the plan’s commitment to equitable retirement savings for everyone.
If your plan fails any mandatory nondiscrimination tests, be prepared to make the necessary corrections as outlined by the IRS.